What is supply chain management?
Seven Eleven Japan
A supply chain strategy framework
Components of a SCM
Major obstacles and common problems
Traditional View:Supply Chains in the
Economy (1990, 1996)
Freight Transportation $352, $455 B
– Transportation manager in charge
– Transportation software
Inventory Expense $221, $311 B
– Inventory manager in charge
– Inventory software
Transportation and inventory managers
Administrative Expense $27, $31 B
Logistics related activity 11%, 10.5% of GNP
$898 B spent domestically for SC activities in 1998
Traditional View: Cost breakdown of a
Profit 10% Profit
Supply Chain Cost 20% Marketing
Marketing Cost 25%
Manufacturing Cost 45% Cost
What can Supply Chain Management do?
Estimated that the grocery industry could save $30 billion (10% of
operating cost by using effective logistics and supply chain
– A typical box of cereal spends 104 days from factory to sale
– A typical car spends 15 days from factory to dealership
– Box of cereal more complex than a car?
Laura Ashley turns its inventory 10 times a year, five times faster
than 3 years ago
National Semiconductor used air transportation and closed 6
warehouses, 34% increase in sales and 47% decrease in delivery
Magnitude of Supply Chain Management
Compaq estimates it lost $0.5 billion to $1 billion in sales
in 1995 because laptops were not available when and
When the 1 gig processor was introduced by AMD
(Advanced Micro Devices), the price of the 800 meg
processor dropped by 30%
P&G (Proctor&Gamble) estimates it saved retail
customers $65 million (in 18 months) by collaboration
resulting in a better match of supply and demand
Importance of SCM understood by some
– "The biggest issue enterprises face today is intelligent visibility of their
supply chains-both upstream and down"
– "Companies need to sense and proactively respond to unanticipated variations
in supply and demand by adopting emerging technologies such as intelligent
agents. To boost their operational agility, firms need to transform their static
supply chains into adaptive supply networks”
– “By 2004 90% of enterprises that fail to apply supply-chain management
technology and processes to increase their agility will lose their status as
SCM Generated Value
Minimizing supply chain costs
while keeping a reasonable service level
customer satisfaction/quality/on time delivery, etc.
This is how SCM contributes to the bottom line
SCM is not strictly a cost reduction paradigm!
A picture is better than 1000 words!
How many words would be better than 3 pictures?
- A supply chain consists of
Supplier Manufacturer Distributor Retailer Customer
- aims to Match Supply and Demand,
profitably for products and services
SUPPLY SIDE DEMAND SIDE
+ + + + +
Detergent supply chain:
P&G or other Third Albertson’s Customer wants
manufacturer party DC Supermarket detergent
(e.g. Oil Company)
(e.g. Oil Company)
Flows in a Supply Chain
The flows resemble a chain reaction.
SCM in a Supply Network
Supply Chain Management (SCM) is concerned with the management and control of
the flows of material, information, and finances in supply chains.
Products and Services
THAILAND INDIA MEXICO TEXAS US
N-Tier Suppliers Suppliers Logistics Distributors Retailers
Supply Side OEM Demand Side
The task of SCM is to design, plan, and execute the activities at the different stages
so as to provide the desired levels of service to supply chain customers profitably
Importance of Supply Chain Management
In 2000, the US companies spent $1 trillion (10% of GNP) on supply-related
activities (movement, storage, and control of products across supply chains).
Source: State of Logistics Report
Frequent Supply Low order fill
shortages Inefficient rates
Tier 1 Manufacturer Distributor Retailer Customer stockouts
Glitch-Wrong Material, Ineffective
Machine is Down – High inventories High landed costs
through the chain promotions to the shelf
Eliminating inefficiencies in supply chains can save millions of $.
Cycle View of Supply Chains
Replenishment Cycle 0. Customer arrival
1. Customer triggers an order
Distributor 2. Supplier fulfils the order
3. Customer receives the order
Push vs Pull System
What instigates the movement of the work in the system?
In Push systems, work release is based on downstream demand
– Keeps inventory to meet actual demand
– Acts proactively
» e.g. Making generic job application resumes today (e.g.: exempli gratia)
In Pull systems, work release is based on actual demand or the
actual status of the downstream customers
– May cause long delivery lead times
– Acts reactively
» e.g. Making a specific resume for a company after talking to the recruiter
Push/Pull View of Supply Chains
Procurement, Customer Order
Manufacturing and Cycle
PUSH PROCESSES PULL PROCESSES
Examples of Supply Chains
Dell / Compaq
Toyota / GM / Volkswagen, in the course notes
McMaster Carr / W.W. Grainger, sell auto parts
Amazon / Barnes and Noble
Frozen food industry/Fast food industry/5 star restaurants
Internet shopping: Webvan / Peapod
Seven Eleven Japan (SEJ)
A Case Study
Factual Information on Seven Eleven Japan (SEJ)
Largest convenience store in Japan with market value of $95 B. The third largest
retail company in the world after Wal-Mart and Home Depot.
Established in 1974.
In 2000, total sales $18,000 M, profit $620 M.
Average inventory turnover time 7-8.5 days.
Stock value increased by 3000 times from 1974 to 2000.
In 2000, there were 2000 stores in Japan, increasing by 400-500 per year.
A SEJ store is about the half the size of a US 7-eleven store, that is about 110 m2.
– 32.9% Processed food: drinks, noodles, bread and snacks
– 31.6% Fast food: rice ball, box lunch and hamburgers
– 12.0% Fresh food: diary products
– 25.3% Non-food: magazines, ladies stockings and batteries.
More on SEJ
More factual info:
Average sales about twice of an average US store
SKU’s offered in store: Over 3,000 (change by time of day, day of week, season)
Virtually no storage space
No food cooking at the stores
Japanese Images of Seven Eleven:
Cheerful and lively stores
Many ready made dinner items I buy
Famous for its great boxed lunch and dinner
On weekends, when I was single, I went to buy lunch and dinner
Micro matching of supply and demand (by location, time of day, day of week, season)
Seven Eleven - Number of Stores
3000 Number of Stores
85 86 87 88 89 90 91 92 93 94
Seven Eleven - Net Sales (B Yen)
Sales 1,963 B Yen in 2000
85 86 87 88 89 90 91 92 93 94
Quick access to up to date information (as opposed to data):
In 1991, SEJ implemented Integrated Service Digital Network to link stores, headquarter,
DCs and suppliers
Customer checkout process
– Clerk records the customer’s gender, (estimated) age and purchased items. These Point of Sales
(POS) data are transmitted to database at the headquarters.
Daily use of the data
– Headquarters aggregate the data by region, products and time and pass to suppliers and stores by
next morning. Store managers deduce trend information.
Weekly use of the data
– Monday morning, the CEO chairs a weekly strategy formulation meeting attended by 100
– Tuesday morning, strategies are communicated to Operation Field Counselors who arrive in
Tokyo on Monday night.
– Tuesday afternoon, regional elements (e.g. weather, sport events) are factored into the strategy.
Tuesday nights, field counselors return back to their regions.
Store hardware: Store computer, POS registers linked to store computer, Graphic Order Terminals,
Scanner terminals for receiving
Information Analysis of POS Data
Sales analysis of product categories over time
Analysis of waste or disposal
Ten day (week) sales trend by SKU
Sales trends for new product
– In the early 1990s, half-prepared fresh noodle sales were going up, new fresh noodle
products were developed
Sales trend by time and day
– Different sales patterns for different sizes of milk at different times of the day results in
rearrangement of the milks in the fridge
List of slow moving items
– About half of 3000 SKUs are replaced by new ones every year
Limited storage space at stores
– Frequent and small deliveries to stores
Deliveries arrive from over 200 plants.
Products are grouped by the cooling needs
– Such product groups are cross-docked at distribution centers (DC). Food DCs store no
– Combined delivery system: frozen foods, chilled foods, room temperature and hot foods.
– A single truck brings a group of products and visits several stores within a geographical region
– Aggregation: No supplier (not even coke!) delivers direct
The number of truck deliveries reduced from 70/day in 1974 to 10/day in 2000. Still, at
least 3 fresh food deliveries per day.
Have many outlets, at convenient locations, close to where customers can walk
Focus on some territories, not all: When they locate in a place they blanket the area with
stores; stores open in clusters with corresponding DC’s.
844 stores in the Tokyo region; Seven Eleven has 5,523 stores in 25 out of 47 prefectures.
No stores in Kobe.
The Present and the Future
Is food preparation a good idea at 7-eleven locations?
– e.g. Compare microwave heating vs. salad preparation.
Why SEJ does not allow direct delivery from suppliers to retailers?
Point out which of the following strategies can also be used in US
– Information strategy
– Facilities strategy
Discuss the differences between the Japanese and US consumers with regard to
– Frequency and amount of grocery purchase
– Use of credit cards vs. cash for purchase
7-eleven growing rapidly in the US so it aims to be a web depot in both the US and Japan.
Does this make sense from a supply chain perspective?
– Cost vs. Responsiveness
– Business strategy
– The reason for existence of an organization
– A clear statement of purpose
– A plan for achieving organizational goals
– The actions taken to accomplish strategies
– Day to day decisions to support tactics
Life Strategy for Ted
Ted is an undergrad. He would like to have a career in
business, have a good job, and earn enough income to
Mission: Live a good life
Goal: Successful career, good income
Strategy: Obtain a master’s degree
Tactics: Select a college and a concentration
Operations: Register, buy books, take
courses, study, graduate, get job
Linking SC and Business Strategy
Competitive (Business) Strategy
New Product Marketing
Supply Chain Strategy
Product and Operations Distribution Service
Finance, Accounting, Information Technology, Human Resources
Product development strategy relates to Set of products/services
and technologies for future operations
– e.g. Be the technology leader
– e.g. Offer many products
Marketing and sales strategy relates to positioning, pricing and
promotion of products/services
– e.g. Never offer more than 40% discount
– e.g EDLP = every day low price
– e.g. Demand smoothing via coupons
Supply chain management strategy relates to procurement,
transportation, storage and delivery
– e.g. Never use more than 1 supplier for every input
– e.g. Never expedite orders just because they are late
Achieving Strategic Fit: Consistent SCM
and Competitive strategies
Fit SC to the customer
Understanding the Customer
– Range of demand
– Production lot size
– Response time
– Service level
– Product variety for SC
– Price sensitivity Implied
– Innovation trouble
Contributors to Implied Demand Uncertainty
Detergent High Fashion
Commodities Customized products
Long lead time steel Emergency steel
Low Implied Demand Uncertainty High
Small production lot sizes, short lead times, product variety,
distribution channel variety, high rate of innovation and
high customer service levels all increase
the Implied Demand Uncertainty
Understanding the Supply Chain:
Responsiveness (in time, high service and variety)
Fix responsiveness Inefficient Impossible
Cost in $
Why decreasing slope for the efficiency frontier?
Achieving Strategic Fit
Responsivenes n e o Fi t
spectrum Zo egic
Certain Implied Uncertain
demand uncertainty demand
utdallas.edu/~metin spectrum 39
Loosing the strategic fit: Webvan
Webvan started a merger with HomeGrocer in Sept 2000 and
completed in May 2001.
Declared bankruptcy in July 2001. Why?
– “Webvan was so behemoth that could deliver anything to anyone anywhere
that it lost sight of a more mundane task: pleasing grocery customers day
– Short to midterm cash mismanagement. Venture capital of $1.2 B run out.
– Merger costs: duplicated work force, integration of technology, realignment
Peapod has the same business model but more focused in terms of
service and locations. It actually survives with its parent company
Royal Ahold’s (Dutch Retailer) cash.
Big retailers’ Strategy
Target: More quality and service
Carrefour: International, ambiance
– Squeezed between Target and Wal-Mart
– Reliance on coupon sales
– Do coupons stabilize or destabilize a Supply chain?
Multiple products. Multiple customers for a given product
– Separate supply chains or Tailored supply chains
» e.g. Compaq
– Product and/or customer classes
» e.g. UTD library loans books for 6 months (2 weeks) to faculty (students)
Product life cycle (shortening)
– SCM strategy moves toward efficient chain and low implied uncertainty as
» e.g. Air travel is becoming more efficient
– Macroeconomic factors for visibility
» Forecasting Home Depot sales from S&P 500 price index.
Competitors: more, faster and global
» E.g. Southwest airlines lead the drive for efficiency
Integration is the central theme in SCM
Building synergies by integrating business functions,
departments and companies
Supply Chain Drivers and Obstacles
Drivers of Supply Chain Performance
How to achieve
Supply chain structure
Inventory Transportation Facilities Information
Convenience: Cycle inventory
– No customer buys eggs one by one
Unstable demand: Seasonal inventory
– Bathing suits
Randomness: Safety inventory
– Compaq’s loss in 95
– Work in process or transit
For Long run averages = Expected values
I=Pipeline inventory; R=output per time=throughput;
T=delay time=flow time
Spend 1 minute
Flow time? Thruput? Inventory?
– Flexible vs. Dedicated
– Flexibility costs
» Remember BMW: “a sports car disguised as a sedan”
Inventory-like operations: Receiving, Prepackaging,
Storing, Picking, Packaging, Sorting, Accumulating,
– Job Lot Storage: Need more space. Reticle storage in fabs.
– Crossdocking: Wal-Mart
Information drives the decisions:
– Good information means good decisions
IT helps: MRP, ERP, SAP, EDI
How to use information?
Considerations for Supply Chain Drivers
Driver Efficiency Responsiveness
Inventory Cost of holding Availability
Transportation Consolidation Speed
Facilities Consolidation / Proximity /
Information Low cost/slow/no High cost/
Major Obstacles to Achieving Fit
SC is big:
– Variety of products/services
– Spoiled customer
– Multiple owners (Procurement, Production, Inventory,
Marketing) / multiple objectives
Local optimization and lack of global fit
Dealing with Multiple Owners / Local
– Information sharing / Shyness / Legal and ethical issues
– Mechanisms to align local objectives with global ones
Major obstacles to achieving fit
Instability and Randomness:
– Increasing product variety
– Shrinking product life cycles
– Customer fragmentation: Push for customization
– Fragmentation of Supply Chain ownership: Globalization
Increasing implied uncertainty
Lack of SCM metrics: How to measure responsiveness?
» How to measure efficiency, costs, etc?
Poor IT design
» Unreliable, duplicate data
Poor delivery status information
» Not knowing the order status
Internal customer discrimination
» Giving lower priority to internal customers than external customers
Elusive inventory costs
SC-insensitive product design